Goodspeed Analysis: Bo Xilai scandal a symbol of corruption that has surged with Chinese economy

The Chinese call it hei shehui or “black society” — a vast flourishing underworld of crime, corruption and greed that has become the most pervasive and dangerous side effect of China’s economic miracle

The Chinese call it hei shehui or “black society” — a vast flourishing underworld of crime, corruption and greed that has become the most pervasive and dangerous side effect of China’s economic miracle.

It is supposed to be secret, but it is everywhere.

Officials have expensive foreign cars, endless banquets, foreign trips and generous rounds of drinks. Bureaucrats use their family connections and public influence to build private fortunes; public funds are diverted into stock and real estate speculation; farms and old apartments are illegally expropriated and resold to developers.

Factories bribe officials to get supplies; truck drivers are constantly stopped for “safety inspections” that can be avoided with a “special fine;” police officers demand money for residency permits; railway ticket sellers need extra cash to find a seat on a train and farmers give bureaucrats packets filled with money during the Chinese New Year to make sure they get enough seeds to plant their next crop.

“Corruption is something you find across all elements in China,” says Brock University professor Charles Burton, a former diplomat in China. “It’s hard to find any official in China whose lifestyle is consistent with their civil service salary.”

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Last summer, the People’s Bank of China briefly published a report on its Internet website that looked at how corrupt Chinese officials transfer assets overseas.

Quoting statistics compiled by the Chinese Academy of Social Sciences, the study said more than 18,000 Communist party and government officials had fled China between 1990 and 2008 with more than $123-billion in tainted money.

The missing funds equalled China’s entire education budget from 1978 to 1998 and they were generally funnelled into the United States, Canada, Australia and the Netherlands through offshore bank accounts or as property investments.

Within hours of the reports’ appearance, it was purged from public view and has never been seen again.

Corruption is so endemic in China it helped trigger the massive public protests that ended in the bloody Tiananmen Massacre in 1989.

But in the years since, corruption has surged right along with the exponential growth of China’s economy.

A recent study by Global Financial Integrity, a Washington-based research and advocacy organization working to curtail money laundering in developing countries, said China ranks first in the world in illicit financial flows. It estimates that between 2000 and 2009, China exported more than $2.74-trillion in illicit funds — more than five times that of drug-dealing Mexico, the second-place offender.

“Unimaginable sums of money are illegally leaving China every single day,” writes Sarah Freitas, an economist at Global Financial Integrity.

Now, as China reels from its biggest political scandal in two decades with the sudden demotion of Bo Xilai, a powerful Politburo member and Chinese Communist Party secretary in the mega city of Chongqing, there is a renewed focus on the rampant corruption that pervades China.

Mr. Bo, a “princeling” of the Chinese Communist party, whose father was one of the party’s founding revolutionary “immortals,” was seen as a key figure in the next generation of China’s leadership. But early this month he was stripped of all his public posts and his wife was accused of involvement in the “intentional homicide” of a British businessman, who had been close to her family.

‘At this stage of its development, China offers too many temptations, and the collusion of money and power is commonplace’

The rumours and comments surrounding the case have once again turned the spotlight on corruption at the highest levels of China’s government. Allegations of “serious disciplinary violations” by Mr. Bo have been matched by reports his wife, a successful lawyer, had shifted millions of dollars overseas.

Their son, a 24-year old student at Harvard University who attended prestigious and expensive Harrow in Britain, has a reputation for driving expensive sports cars and registered a technology company with $320,000 in start-up-capital in 2010.

Mr. Bo’s brother was, until he resigned this week, a multi-millionaire vice-chairman of China Everbright International, one of China’s biggest state-owned conglomerates. A sister-in-law owns a stake in a printing company that was reportedly valued at $400-million and, according to the Bloomberg news agency, Mr. Bo’s wife “controlled a web of businesses from Beijing to Hong Kong to the Caribbean worth at least $126-million.”

Not bad for a public servant who officially earns less than $26,000 a year and who boasted his wife is a stay-at-home mother.

It is not a coincidence Mr. Bo’s downfall was accompanied by an unsigned editorial in the People’s Daily newspaper that lambasted officials who use their families and mistresses to send money overseas.

A similar editorial in the feisty business magazine Caixin warned last week: “[Bo’s arrest] isn’t a typical case of graft. Nevertheless, it illustrates the irrefutable truth that unchecked power leads to corruption.”

“As a rule, corruption thrives in an authoritarian regime,” the magazine said. “A leader with exceptional self-discipline may be able to stay above board. But, at this stage of its development, China offers too many temptations, and the collusion of money and power is commonplace.”

China is full of tales of powerful top officials who destroyed themselves through decadence and greed.

China boasts the world’s most extensive and expensive high-speed rail network and is spending $120-billion in the next few years to expand it. But when two high-speed trains collided last year, killing 32 people, an investigation into the accident resulted in the firing of the country’s railway minister.

According to Central China TV, Zhang Shuguang, the former deputy chief engineer at the Ministry of Railways, is accused of having bank deposits abroad that amounted to $2.8-billion. Railway Minister Liu Zhijun, who was also fired, was said to have walked away with $155-million.

Lai Changxing, once considered China’s most-wanted fugitive, went on trial early in April, accused of using cash, liquor and prostitutes to bribe officials while he ran the country’s largest-ever smuggling ring.

He unsuccessfully battled deportation in Canada for a decade, insisting he risked torture and execution in China, if convicted of masterminding a $10-billion network that smuggled everything from cigarettes to cars to oil and allegedly bribed dozens of government officials between 1996 and 1999.

China’s top bureaucrats generally appear to be bland but their ability to collect and spend secret fortunes is staggering.

In February 2011 the Chinese Internet buzzed with fascination over the story, published in a respected business magazine Caijing that described the sexual and business adventures of billionaire businesswoman Li Wei.

A Vietnamese refugee who was raised in southern Yunnan province, she made a fortune in tobacco, real estate and finance by serving as the mistress to more than 15 top Chinese officials.

Her network of guanxi relationships stretched through Yunnan, Guangdong, Shandong and Beijing and at the height of her power she owned 20 companies and over 200 gas stations.

Eventually she was arrested for income tax evasion in 2006, but rapidly turned state’s evidence and testified at the trials of her former lovers.

Among her conquests were: Li Jiating, the former governor of Yunnan province, who was sentenced to death for embezzling millions; Chen Tonghai, the ex-chairman of China’s second-largest oil company, Sinopec, who was given a suspended death sentence for taking $30-million in bribes; Liu Zhihua, a former vice-mayor of Beijing who supervised construction of the Beijing Olympics and was sentenced to death for taking $1.45-million in bribes; Zheng Shaodong, the former head of China’s Economic Criminal Investigation Bureau who was sentenced to death for corruption and Huang Songyou, a deputy head of the Supreme Court who is serving a life sentence for receiving $1-million worth of bribes.

Ms. Li was released from jail in late 2010 and is said now to be living in Hong Kong, where she continues to enjoy her wealth and may, according to the magazine, possess a diary that could implicate many more Chinese officials.

“Failure to contain endemic corruption among Chinese officials poses one of the most serious threats to the nation’s future economic and political stability,” says Minxin Pei, a professor at Claremont McKenna College in California.

In a 2007 study on corruption in China for the Carnegie Endowment for International Peace, Mr. Pei estimated 10% of all government spending, contracts and transactions are used as kickbacks and bribes or simply stolen.

“The odds of a corrupt official going to jail are less than 3%, making corruption a high-return, low-risk activity,” he said.

Most prominent corruption cases in China, like the Bo scandal, are often the outgrowth of power struggles within the Chinese Communist Party, with competing factions using the “war of corruption” as a tool to eliminate or weaken rivals.

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